RMK TIMBERLAND GROUP                                                1 Forest Finance, Valuation and    Appraisal…. Oh My!!...
RMK TIMBERLAND GROUP                                        2                       THANKS! –        Arkansas Forestry Ass...
RMK TIMBERLAND GROUP                                                        3     Forest Finance, Valuation and        App...
RMK TIMBERLAND GROUP                                                              4     Forest Finance, Valuation and     ...
RMK TIMBERLAND GROUP                                                         5     Growing ahead of the curve…• When consi...
RMK TIMBERLAND GROUP                                                             6             Presentation OutlineContext...
TIMBERLAND INVESTMENT MANAGEMENT                                   Context                                             We ...
RMK TIMBERLAND GROUP                                                   8                       Who am I?Education: Florida...
RMK TIMBERLAND GROUP                                                      9                       Who is RMK?• Established...
RMK TIMBERLAND GROUP                                                    10                 What’s a TIMO?Definition - A Ti...
RMK TIMBERLAND GROUP                                                       11                       RMK Strategy• Discipli...
RMK TIMBERLAND GROUP                                                                     12                             TR...
RMK TIMBERLAND GROUP                                              13                CLIENT FOCUSED ORGANIZATION
RMK TIMBERLAND GROUP                                  14     Traditional Return Drivers• Biological Growth• Land Value Gro...
RMK TIMBERLAND GROUP                                                15                   RMK Footprint• Total Property und...
RMK TIMBERLAND GROUP                                                             16RMK TIMBERLAND GROUP                   ...
TIMBERLAND INVESTMENT MANAGEMENT                              Question #1                                            We se...
RMK TIMBERLAND GROUP                                                         18     Growing ahead of the curve…• When cons...
RMK TIMBERLAND GROUP                                                        19    Financial Analysis Disclaimers• These ar...
RMK TIMBERLAND GROUP                                                        20  Timberland Valuation and Analysis         ...
RMK TIMBERLAND GROUP                                                           21                       The BasicsTwo Comm...
RMK TIMBERLAND GROUP                                                        22                       The BasicsRevenues: I...
RMK TIMBERLAND GROUP                                                       23                       The Basics• For the mo...
RMK TIMBERLAND GROUP                                                     24                       The Basics• The quality ...
TIMBERLAND INVESTMENT MANAGEMENT                              Question #2                                            We se...
RMK TIMBERLAND GROUP                                                         26     To grow ahead of the curve…• When cons...
RMK TIMBERLAND GROUP                                                    27Key to Understanding TIMOs?Definition - A Timber...
RMK TIMBERLAND GROUP                                              28Key to Understanding TIMOs?Investors / Clients:• Sophi...
RMK TIMBERLAND GROUP                                                29 What RMK does for clients….1. Develop Investment St...
RMK TIMBERLAND GROUP                                      30         TIMOs do lots of financial         analysis!
RMK TIMBERLAND GROUP                                                          31The Analysis follows function….1. Acquire ...
RMK TIMBERLAND GROUP                                                   32Property Valuations >>> Appraisals  Appraisals pr...
RMK TIMBERLAND GROUP                                                  33                       Appraisals“Expert” appraise...
RMK TIMBERLAND GROUP                                                34           TIMO Holding Period• TIMOs often have sho...
TIMBERLAND INVESTMENT MANAGEMENT                             Conclusions                                           We see ...
RMK TIMBERLAND GROUP                                                     36                       ConclusionsIn forestry f...
RMK TIMBERLAND GROUP                                                     37                       ConclusionsTIMOs do have...
RMK TIMBERLAND GROUP                                                  38                       Conclusions• The quarterly ...
RMK TIMBERLAND GROUP                                                    39                       Conclusions• The due dili...
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Forest Appraisal

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Forest Appraisal

  1. 1. RMK TIMBERLAND GROUP 1 Forest Finance, Valuation and Appraisal…. Oh My!!!! Dr. Jefferson H. Mayo RMK Timberland Group Atlanta, Georgia _________________ Arkansas Forestry Association October 5, 2011
  2. 2. RMK TIMBERLAND GROUP 2 THANKS! – Arkansas Forestry Association
  3. 3. RMK TIMBERLAND GROUP 3 Forest Finance, Valuation and Appraisal…. Oh My!!!!Double meaning:1. Common reaction by many when hearing about the nuance and detail of forest finance, valuation and appraisal techniques (then their eyes glaze over….)
  4. 4. RMK TIMBERLAND GROUP 4 Forest Finance, Valuation and Appraisal…. Oh My!!!!Double meaning:1. Common reaction by many when hearing about the nuance and details of forest finance, valuation and appraisal techniques (then their eyes glaze over….)2. Common reaction by some when hearing about the extent of the financial analysis, valuation analysis and appraisal work conducted as part of the routine TIMO business process
  5. 5. RMK TIMBERLAND GROUP 5 Growing ahead of the curve…• When considering intensive silviculture, improved genetics and various management regimes…1. What is the traditional forestry approach to making such financial decisions?2. Anything unique or peculiar about how TIMOs approach these financial decisions?
  6. 6. RMK TIMBERLAND GROUP 6 Presentation OutlineContext Who am I? Who is RMK?Content Question #1 – Traditional Financial Analysis (The Basics) Question #2 - TIMOs – Unique or peculiar?Conclusions
  7. 7. TIMBERLAND INVESTMENT MANAGEMENT Context We see the forest. And we see the trees.
  8. 8. RMK TIMBERLAND GROUP 8 Who am I?Education: Florida, West Virginia and Clemson (+ 10 years)Experience: Union Camp (procurement + 10 years) University of Georgia (+ 3 years) Wachovia / RMK Timberland (-10 years)Current Duties with RMK: Director of Asset Management and Administration
  9. 9. RMK TIMBERLAND GROUP 9 Who is RMK?• Established 1981• RMK Timberland Group is a business unit of Region Financial Corporation (Regions Bank)• Timberland Investment Manager (TIMO)
  10. 10. RMK TIMBERLAND GROUP 10 What’s a TIMO?Definition - A Timberland Investment Management Organization (TIMO) is a provider of timberland investment management services:1. to institutional investors (primarily pension funds, endowments, foundations, etc.) while2. acting in a fiduciary capacity.
  11. 11. RMK TIMBERLAND GROUP 11 RMK Strategy• Disciplined acquisition approach• Diversification of investments (location, species, age, products, etc.)• Disciplined approach to world-wide opportunities• Focus on Client Service
  12. 12. RMK TIMBERLAND GROUP 12 TREES GROW ! GROWTH EMERGING ESTABLISHED MATURE AGE GROWTH GROWTH GROWTH PULPWOOD CHIP-N-SAW SAWTIMBER
  13. 13. RMK TIMBERLAND GROUP 13 CLIENT FOCUSED ORGANIZATION
  14. 14. RMK TIMBERLAND GROUP 14 Traditional Return Drivers• Biological Growth• Land Value Growth• Stumpage Value Growth
  15. 15. RMK TIMBERLAND GROUP 15 RMK Footprint• Total Property under management – 1.6MM acres• U.S. properties in 16 states – 87M acres in Arkansas• Non-U.S. properties in four countries – primarily South America
  16. 16. RMK TIMBERLAND GROUP 16RMK TIMBERLAND GROUP U.S. PROPERTY DISTRIBUTION BY STATE
  17. 17. TIMBERLAND INVESTMENT MANAGEMENT Question #1 We see the forest. And we see the trees.
  18. 18. RMK TIMBERLAND GROUP 18 Growing ahead of the curve…• When considering intensive silviculture, improved genetics and various management regimes…1. What is the traditional forestry approach to making such financial decisions?1. Anything unique or peculiar about how TIMOs approach these financial decisions?
  19. 19. RMK TIMBERLAND GROUP 19 Financial Analysis Disclaimers• These are my observations only…• All the techniques that I mention are actually more detailed and nuanced than I’m presenting … but remember the “eyes glazed over” effect.• No Equation Zone!
  20. 20. RMK TIMBERLAND GROUP 20 Timberland Valuation and Analysis The BasicsDiscounted Cash Flow Analysis (DCF): DCF implies the use of a discount or hurdle rate Rates may be either real or nominal (with inflation)Net Present Value (NPV) Sum of discounted revenues minus sum of discounted expenses over the entire holding periodInternal Rate of Return (IRR) Discount rate at which NPV = ZERO.
  21. 21. RMK TIMBERLAND GROUP 21 The BasicsTwo Common DCF analysis in Timberland Applications:1. Evaluating (valuing) projects for capital decisions – Question: At what price do I buy or sell?1. Marginal Analysis – Question: Is the incremental or marginal cost of some alternative justified by the incremental or marginal revenues generated above the base case?
  22. 22. RMK TIMBERLAND GROUP 22 The BasicsRevenues: Include stumpage prices, harvest volumes, net growth impacts, miscellaneous revenues, price appreciators, period ending values, etc., etc., etc.Expenses: Include annual management costs, taxes, treatment costs, various cost appreciators, etc., etc., etc.
  23. 23. RMK TIMBERLAND GROUP 23 The Basics• For the most part, financial techniques applied to decision–making in timberland analysis are not especially complex• The longer planning horizons can be especially challenging• The “timing” of events (especially asset sales) is key.• There are always constraints…
  24. 24. RMK TIMBERLAND GROUP 24 The Basics• The quality of any DCF analysis depends primarily on the accuracy of the cash flow projections• “It’s the data... It’s the data… It’s the data!”• In practice, cash flows are not usually “well- behaved” so analysis is conducted using spreadsheet or data base apps, not equations.
  25. 25. TIMBERLAND INVESTMENT MANAGEMENT Question #2 We see the forest. And we see the trees.
  26. 26. RMK TIMBERLAND GROUP 26 To grow ahead of the curve…• When considering intensive silviculture, improved genetics and various management regimes…1. What is the traditional forestry approach to making such financial decisions?2. Anything unique or peculiar about how TIMOs approach these financial decisions?
  27. 27. RMK TIMBERLAND GROUP 27Key to Understanding TIMOs?Definition - A Timberland Investment Management Organization (TIMO) is a provider of timberland investment management services:1. to institutional investors (primarily pension funds, endowments, foundations, etc.) while2. acting in a fiduciary capacity.
  28. 28. RMK TIMBERLAND GROUP 28Key to Understanding TIMOs?Investors / Clients:• Sophisticated• High level of felt responsibility and commitment• Objectives vary by clientRole as fiduciary:• Bias toward third-party involvement• Increased documentation and due diligence
  29. 29. RMK TIMBERLAND GROUP 29 What RMK does for clients….1. Develop Investment Strategy to meet client Objectives,2. Acquire Property (to fulfill strategy) ,3. Manage Property during the holding period and4. Dispose of property at financial maturity.
  30. 30. RMK TIMBERLAND GROUP 30 TIMOs do lots of financial analysis!
  31. 31. RMK TIMBERLAND GROUP 31The Analysis follows function….1. Acquire and Dispose of Property: Questions: At what price (or when) do I buy or sell?2. Manage Property during the holding period:• Schedule the cut, strategic and tactical planning, the evaluate stand treatments or regimes, etc.• Determine property valuations for return calculation
  32. 32. RMK TIMBERLAND GROUP 32Property Valuations >>> Appraisals Appraisals provide an estimate of market value (an average expected sales price for similar property) Typically use multiple approaches to value: • The cost approach • The sales comparison approach and • The income approach
  33. 33. RMK TIMBERLAND GROUP 33 Appraisals“Expert” appraisers are required…• Heterogeneous nature of real property• No readily available, market-based pricing system• Appraisals usually done annually, returns quarterly• Remember the “Third-party bias”
  34. 34. RMK TIMBERLAND GROUP 34 TIMO Holding Period• TIMOs often have shorter duration planning horizons• Higher resolution – often annual – planning periods• This situation requires better data
  35. 35. TIMBERLAND INVESTMENT MANAGEMENT Conclusions We see the forest. And we see the trees.
  36. 36. RMK TIMBERLAND GROUP 36 ConclusionsIn forestry financial analysis:• DCF is king… although not too complicated• We are cash flow builders• “It’s the data... It’s the data… It’s the data!”
  37. 37. RMK TIMBERLAND GROUP 37 ConclusionsTIMOs do have some unique / peculiar traits:• The nature of the investments, sophistication of clients and fiduciary responsibility drive TIMO behavior.• Often use third-party inputs – appraisals, price reporting services, audits, etc.• TIMO basic business functions are analysis intensive… we are investment managers
  38. 38. RMK TIMBERLAND GROUP 38 Conclusions• The quarterly valuation / annual appraisal process is significant and requires improved systems• TIMO holding periods impact analysis and data requirements• In some ways, the “bar is being raised” regarding “best practices” for due diligence, valuation, documentation and reporting.
  39. 39. RMK TIMBERLAND GROUP 39 Conclusions• The due diligence and analysis process for acquisitions and dispositions is significant.• The application of planning and analysis to on- going management activities is significant• The “bar is being raised” for timberland best practices for due diligence, valuation, documentation and reporting.
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